I think there are penalties for withdrawing contributions to a Roth that haven't been in place for 5 years (5 year rule?). If true, these would prevent the funds from being used in an emergency.

I reply:

There is such a rule, but it doesn't always apply. There are three ways money can get into a Roth IRA account: (1) annual contribution (limited to $2000 annually), (2) conversion from traditional IRA, and (3) earnings (yaaay!). By operation of law, the first money you remove from a Roth IRA is deemed to consist of annual contributions. Those may be withdrawn at any time without tax or penalty.

Once annual contributions are exhausted, the next withdrawals are deemed to be money converted from traditional IRAs. That's where the five tax-year rule comes in. If withdrawn prematurely (during the five tax years after the first conversion), converted funds are subject to the 10% penalty, but no other tax (because they were taxed upon conversion, if not earlier). Incidentally, this structure appears to open a loophole. Convert a small amount of money to a Roth IRA today, and once five years have elapsed, any further conversions can be immediately withdrawn without penalty. In other words, unless the law or regulations change, this is a penalty-free method of getting money out of a traditional IRA.

Finally, once conversions are exhausted, all remaining funds are deemed to be earnings. If withdrawn prematurely, they are subject to both tax and penalty. --Bob